Almost 90% of SPACs have had to restate financials
Accounting for warrants is the main driver of the restatements
|Monday, August 2, 2021|
By Robert Freedman in CFODive.com
The restatements, either to the company’s 10-K or 10-Q, have been made mainly by the operating company rather than by the SPAC that’s trying to get SEC approval, the Accounting Today report said.
The SEC in April said the warrants should be treated as liabilities rather than as equity because of investor redemption risk.
As liabilities, the warrants must be valued quarterly, and because of the specialized terms companies are using in their warrant agreements, companies are having to use a complicated valuation process, like Monte Carlo or binomial tree, rather than something more basic like Black-Scholes. Monte Carlo factors in randomness while binomial tree looks at valuation over a period of time.
Reclassifying the warrants as liabilities tends to have a cascading effect on reporting. “When you reclassify the liabilities you’ve got to go back to the financial statements you issued and mark to market any changes, gains and losses, to the P&L, which obviously has an income statement effect, including to a balance sheet,” Frangiskatos said in the Accounting Today report.
CFO Dive / Audit Analytics data via WSJ
Restatements involving operating companies, which are the targets of SPAC mergers, tend to happen during what’s known as the deSPAC process; that’s the point at which the SPAC has identified and then begun the merger process with the operating company. Restatements involving the SPAC sponsor tend to happen prior to that point, when the entity is trying to get SEC approval so it can start looking for a merger target.
The restatements at the SPAC level have slowed the SEC approval process, but analysts say the slowdown is temporary; the surge in SPACs, a way for companies to go public without using a traditional IPO process, is expected to continue.